Why Germany is so successful with manufactured exports

When discussing global export successes in manufactured and value add goods Germany is always mentioned – and with good reason.

The German manufacturing exports CV is about as good as they come in this area.

Let’s look at some of the key credentials.

Manufacturing and most of it is at the higher end of the value chain, accounts for over 21 percent of the German Economy – nearly double that of Britain and more than one third more in percentage terms than the United States.

The German manufacturing sector is growing as indeed is the annual value of German manufactured exports, which exceeds $1.5 trillion over 12 months and getting bigger each year.

This industry creates more than 300,000 well paid positions of long term employment for German workers and many more wage jobs besides.

While most manufacturing economies are losing jobs to China, German manufactured exports from Germany to China are increasing and have done so for more than a decade.

More than 1,000 small medium German manufacturing firms, many with employee numbers of less than 250 are world leaders in their chosen technical niche. This SME sector is growing in size and spawning yet more technically innovative enterprises that produce quality manufactured goods for export.

Few natural advantages

Yet Germany has few natural geo-economic advantages such as those enjoyed by Australia such as vast agricultural and mineral wealth.

Indeed, most of the mineral wealth in the central European zone is long depleted or far underground and expensive to extract.

Many of the raw materials required for manufacturing such as coal and many ores are almost 100 percent imported. Many basic foodstuffs are imported.

In terms of shipping lanes and international transport hubs and sea lanes Germany is not particularly well placed.

To the west and north and south Germany is surrounded by other first tier economies interested only in products of high quality and advanced technology. To the east are developing economies some of which are struggling some in near basket case condition.

Discipline and commitment

So with so few natural advantages where does all this success come from?

German economic and manufacturing success has come from its people their ingenuity, organisation, discipline and commitment.

The German collaboration and trust between Government, workers, unions, banks and research institutes seems quite astonishing when contrasted with the more fractious and combative elements within the Australian economy.

German engineering pedigree and the education required to underwrite advanced engineering goes back to the 1850s and earlier, before federation.

From the late 1800s German engineering has been at the global forefront of standardising weights and measures, precision engineering, metallurgy, machine tools, chemicals (e.g. dyes & fertilisers), optics (e.g. camera lenses, microscopes) and later electrics, automotive, aeronautical, rocket science, plastics and so on.

High tariffs and import quotas

German industry was protected in the first instance by high tariffs and import quotas.

But critically this protection and industry support was used not to lazily create shoddy overpriced products as was so often the case in Britain and Australia. Instead, it helped them to manufacture world class quality products at a world competitive price with the obvious export income benefits – a model the Japanese would use to great effect decades later.

The five major platforms that appear central to German success are as follows:

German Education – particularly in the engineering and sciences has not pursued ideologically defined social equity style outcomes to the same extent as has the American or Australian equivalents.

Thus, educational excellence rather than forced equal educational outcomes still plays a prominent role. Similarly, educational pathways to a higher education for trade apprentices moving from say, mechanics to mechanical engineering are well accepted and collaborative between business, Government and the tertiary education sector.

The effect of this is to develop a large pool of technical expertise possessing both an advanced education and hands on practical knowledge.

Research supporting industry – The overall infrastructure supporting German industry is impressive and receives targeted as well as benign tax and other indirect support from Government. The German Fraunhofer Institute is a private R&D organisation that supplies research and development services to thousands of German businesses across more than 200 industry sector disciplines or competencies.

At its most basic, Fraunhofer solves problems of design and technical function at company and product level and importantly can refine and re-feature a product or product suite to move it to the next generational of technical functionality.

Whilst this is not the only means by which German industry grows and proposers the success of such a model or methodology is resounding. Hardly sexy in a Google sort of way but Fraunhofer exemplifies patient, diligent and practical pursuit of affordable relatively low risk outcomes where success stories are the accepted standard. More than one third of Fraunhofer clients are small-medium size enterprises.

Practical application

Australian research (R&D) institutions are certainly not incapable of producing world quality or ground breaking research but lack the same capacity in regard to practical application.

Similarly, efforts at commercialising any R&D either collapse into a mire of patronage and cronyism or go into massive overreach trying to quickly “knock it out of the park,” thus crashing early rather than the more incremental and measured German approach.

German banks and subsidiary institutions may not be perfect but their track records in supporting local industries, particularly industries that are intensive in technical knowledge and standards – thus difficult to send off to China or some other low wage economy – is impressive. And where supporting a new businesses or supporting a business transitioning upmarket or to a new generation of product is considered a normal way of doing business.

The role of some VC firms in Australia, which is viewed by many as excessively mercenary, has resulted in so many small Australian firms or innovations showing commercial promise to be gobbled up, artificially fattened up and then flipped off to a pre-arranged multinational buyer for a fat fee. In many cases they are little more than talent scouts for the big multinationals.

Few rare exceptions

The effect of this on the Australian economy, with a few rare exceptions, is to remove from play small innovative firms that would in all probability grow to some niche commercial prominence.

In turn such businesses would create Australian based well paid hi-tech jobs as well as generating all the attendant benefits in requirements for ancillary supporting services, spreading higher levels of technical know-how through the economy, generating export income, providing taxation revenues and so on.

To be sure various Government quango attempts at state and federal level have taken place over the last 30 years to provide capital to smaller innovative Australian businesses and while well intentioned they have largely failed due to what many believe is rampant cronyism and the seemingly irresistible siren calls of political patronage.

Finally, German organisational structures and organisational development whilst not perfect and while succumbing to human foibles like every place else nonetheless still manages to appoint a relatively greater number of qualified people into key roles than does Australia business.

Long term vision and commitment

Moreover, organisational delegation and information gathering and intra company information distribution while again not perfect are relatively better than most Australian examples.

Well qualified people tend to hire and promote other well qualified people relatively safe in the knowledge that their continued employment and the esteem in which they are hold will mostly rely on competently discharging their duties rather than other non-commercially useful acts of business folly.

The German manufactured export success story is not as a result of accidental magic. It takes hard work and long-term vision and commitment. Yet all the tools and means to achieve the same are here in Australia.

The bigger question is not why Germany is so successful in the area of value-add manufactured exports but rather why Australia is not.

David Gray is lead consultant at BizTechWrite providing technical and business process documentation services in addition to language translation, geopolitical and geo-economic analysis papers. David can be contacted at: biztechwrite@gmail.com